10-Q 1 q2201310-q.htm 10-Q Q2 2013 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2013
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19417
 
PROGRESS SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
 
 
MASSACHUSETTS
(State or other jurisdiction of
incorporation or organization)
 
04-2746201
(I.R.S. Employer
Identification No.)
14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)(Zip code)
Telephone Number: (781) 280-4000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
Accelerated filer
 
¨
Non-accelerated filer
 
¨
Smaller reporting company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨ No  ý
As of July 1, 2013, there were 54,110,689 shares of the registrant’s common stock, $.01 par value per share, outstanding.



PROGRESS SOFTWARE CORPORATION
FORM 10-Q
FOR THE SIX MONTHS ENDED MAY 31, 2013
INDEX

 
 
 
PART I
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 
 
 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets
 
(In thousands, except share data)
May 31,
2013
 
November 30, 2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
218,387

 
$
301,792

Short-term investments
37,417

 
53,425

Total cash, cash equivalents and short-term investments
255,804

 
355,217

Accounts receivable (less allowances of $2,536 and $3,024, respectively)
50,772

 
70,793

Other current assets
26,782

 
16,478

Deferred tax assets
13,254

 
16,301

Assets held for sale
11,236

 
68,029

Total current assets
357,848

 
526,818

Property and equipment, net
59,352

 
63,071

Intangible assets, net
11,430

 
5,119

Goodwill
224,440

 
226,110

Deferred tax assets
26,776

 
26,565

Investments in auction rate securities
26,500

 
26,321

Other assets
4,747

 
10,973

Total assets
$
711,093

 
$
884,977

Liabilities and shareholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
6,594

 
10,477

Accrued compensation and related taxes
23,053

 
39,105

Income taxes payable
154

 
21,486

Other accrued liabilities
29,480

 
39,876

Short-term deferred revenue
102,094

 
103,925

Liabilities held for sale
4,012

 
25,285

Total current liabilities
165,387

 
240,154

Long-term deferred revenue
1,293

 
2,817

Deferred tax liabilities
515

 
1,032

Other noncurrent liabilities
1,660

 
2,575

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value; authorized, 1,000,000 shares; issued, none

 

Common stock, $0.01 par value, and additional paid-in capital; authorized, 200,000,000 shares; issued and outstanding, 54,046,817 shares in 2013 and 59,594,961 shares in 2012
232,838

 
300,333

Retained earnings, including accumulated other comprehensive loss of $13,139 in 2013 and $10,764 in 2012
309,400

 
338,066

Total shareholders’ equity
542,238

 
638,399

Total liabilities and shareholders’ equity
$
711,093

 
$
884,977

See notes to unaudited condensed consolidated financial statements.

3


Condensed Consolidated Statements of Income
 
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
May 31,
2013
 
May 31,
2012
 
May 31,
2013
 
May 31,
2012
Revenue:
 
 
 
 
 
 
 
Software licenses
$
29,347

 
$
20,506

 
$
59,254

 
$
50,179

Maintenance and services
52,358

 
53,622

 
106,184

 
106,420

Total revenue
81,705

 
74,128

 
165,438

 
156,599

Costs of revenue:
 
 
 
 
 
 
 
Cost of software licenses
1,356

 
1,357

 
3,446

 
2,743

Cost of maintenance and services
6,990

 
7,114

 
14,640

 
14,039

Amortization of acquired intangibles
143

 
139

 
282

 
383

Total costs of revenue
8,489

 
8,610

 
18,368

 
17,165

Gross profit
73,216

 
65,518

 
147,070

 
139,434

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
25,890

 
19,373

 
54,532

 
42,115

Product development
14,671

 
10,387

 
28,293

 
20,699

General and administrative
14,064

 
18,014

 
28,730

 
33,414

Amortization of acquired intangibles
167

 
208

 
338

 
415

Restructuring expenses
2,766

 
4,736

 
3,726

 
4,736

Acquisition-related expenses
1,272

 

 
1,272

 
215

Total operating expenses
58,830

 
52,718

 
116,891

 
101,594

Income from operations
14,386

 
12,800

 
30,179

 
37,840

Other (expense) income:
 
 
 
 
 
 
 
Interest income and other
244

 
743

 
775

 
1,335

Foreign currency loss, net
(536
)
 
(494
)
 
(1,615
)
 
(816
)
Total other (expense) income, net
(292
)
 
249

 
(840
)
 
519

Income from continuing operations before income taxes
14,094

 
13,049

 
29,339

 
38,359

Provision for income taxes
5,952

 
4,194

 
11,384

 
13,644

Income from continuing operations
8,142

 
8,855

 
17,955

 
24,715

Income (loss) from discontinued operations, net
(4,232
)
 
(10,763
)
 
17,073

 
(19,134
)
Net income (loss)
$
3,910

 
$
(1,908
)
 
$
35,028

 
$
5,581

Earnings per share:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.15

 
$
0.14

 
$
0.32

 
$
0.39

Discontinued operations
(0.08
)
 
(0.17
)
 
0.30

 
(0.31
)
Net income (loss) per share
$
0.07

 
$
(0.03
)
 
$
0.62

 
$
0.09

Diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.15

 
$
0.14

 
$
0.31

 
$
0.39

Discontinued operations
(0.08
)
 
(0.17
)
 
0.30

 
(0.30
)
Net income (loss) per share
$
0.07

 
$
(0.03
)
 
$
0.61

 
$
0.09

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
54,919

 
63,051

 
56,410

 
62,598

Diluted
55,736

 
63,051

 
57,244

 
63,641

See notes to unaudited condensed consolidated financial statements.

4


Condensed Consolidated Statements of Comprehensive Income (Loss)

 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2013
 
May 31, 2012
 
May 31, 2013
 
May 31, 2012
Net income (loss)
$
3,910

 
$
(1,908
)
 
$
35,028

 
$
5,581

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2,017
)
 
(5,056
)
 
(2,462
)
 
(2,023
)
Unrealized gains on investments, net of tax of $3 and $51 for the second quarter and the first six months of 2013 and $368 and $91 for the second quarter and first six months of 2012, respectively
5

 
396

 
87

 
819

Total other comprehensive (loss) income, net of tax
(2,012
)
 
(4,660
)
 
(2,375
)
 
(1,204
)
Comprehensive income (loss)
$
1,898

 
$
(6,568
)
 
$
32,653

 
$
4,377


See notes to unaudited condensed consolidated financial statements.


5


Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended
(In thousands)
May 31,
2013
 
May 31,
2012
Cash flows from operating activities:
 
 
 
Net income
$
35,028

 
$
5,581

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property and equipment
5,567

 
4,640

Amortization of acquired intangibles and other
1,910

 
12,339

Stock-based compensation
10,787

 
13,760

Gain on dispositions
(35,106
)
 

Asset impairment
111

 
848

Deferred income taxes
(750
)
 
82

Tax (deficiency) benefit from stock plans
(806
)
 
801

Excess tax benefit from stock plans
(721
)
 
(1,171
)
Allowances for accounts receivable
(35
)
 
443

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
21,410

 
23,262

Other assets
(4,930
)
 
(3,891
)
Accounts payable and accrued liabilities
(23,298
)
 
5,614

Income taxes payable and uncertain tax positions
(22,534
)
 
(10,844
)
Deferred revenue
1,949

 
2,225

Net cash flows (used in) from operating activities
(11,418
)
 
53,689

Cash flows from investing activities:
 
 
 
Purchases of investments

 
(25,887
)
Sales and maturities of investments
15,210

 
44,855

Redemptions and sales of auction rate securities
25

 
225

Purchases of property and equipment
(2,386
)
 
(6,141
)
Payments for acquisitions, net of cash acquired
(9,450
)
 

Proceeds from divestitures, net
73,381

 

Increase in other noncurrent assets
172

 
(52
)
Net cash flows from investing activities
76,952

 
13,000

Cash flows from financing activities:
 
 
 
Proceeds from stock-based compensation plans
32,443

 
20,487

Purchases of common stock related to withholding taxes from the issuance of restricted stock units
(1,915
)
 
(2,452
)
Repurchases of common stock
(176,537
)
 

Excess tax benefit from stock plans
721

 
1,171

Payment of long-term debt

 
(286
)
Net cash flows (used in) from financing activities
(145,288
)
 
18,920

Effect of exchange rate changes on cash
(3,651
)
 
(4,820
)
Net (decrease) increase in cash and cash equivalents
(83,405
)
 
80,789

Cash and cash equivalents, beginning of period
301,792

 
161,095

Cash and cash equivalents, end of period
$
218,387

 
$
241,884




6


Condensed Consolidated Statements of Cash Flows, continued
 
Six Months Ended
 
May 31,
2013
 
May 31,
2012
Supplemental disclosure:
 
 
 
Cash paid for income taxes, net of refunds of $1,812 in 2013 and $127 in 2012
$
52,266

 
$
12,558

Non-cash financing activities:
 
 
 
Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested
$
7,592

 
$
7,638

See notes to unaudited condensed consolidated financial statements.

7


Notes to Condensed Consolidated Financial Statements

Note 1: Basis of Presentation

We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements and these unaudited financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2012.

We made no significant changes in the application of our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended November 30, 2012. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our Annual Report on Form 10-K, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year.

During the fourth quarter of fiscal year 2012 and the first quarter of fiscal year 2013, we completed the divestitures of the ten product lines which were not considered core product lines of our business: Actional, Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic. The divestitures were part of the new strategic plan (the "Plan") we announced during fiscal year 2012. After the announcement of the Plan, we began reporting our results in two reportable segments: Core and non-Core. Since the non-Core segment ceased to exist during the first quarter of fiscal year 2013, after the closing of all these divestitures, we now operate as one reportable segment. In addition, the revenues and direct expenses of the product lines divested are included in discontinued operations in our condensed consolidated statements of income, including prior period amounts which have been revised to reflect the presentation.

In June 2013, we entered into a definitive purchase and sale agreement to divest our Apama product line to Software AG. The target market, deployment and sales model for the Apama product line differs significantly from those of our application development platform and the divestiture allows us to focus entirely on providing leading cloud and mobile application development technologies through a single cohesive platform. The sale is expected to close in July 2013 for $44.3 million. As of May 31, 2013, we met the requirements to classify the sale of this product line as both held for sale and discontinued operations in the consolidated financial statements. The revenues and direct expenses of the Apama product line are included in discontinued operations in our consolidated statements of income, including prior period amounts which have been revised to reflect the presentation.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If after performing the qualitative assessment an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. ASU 2011-08 is effective for us in fiscal year 2013. We adopted ASU 2011-08 during the first quarter of fiscal year 2013 for our annual impairment test, which occurs in the first quarter of our fiscal year. The adoption did not have any impact on our financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 (ASU 2011-12), which defers the effective date of only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. We adopted ASU 2011-05 in our first quarter of fiscal year 2013, and applied it retrospectively. We elected to report comprehensive income as a separate, but consecutive statement to net income. The adoption of ASU 2011-05 did not have any impact on our financial position, results of operations or cash flows.


8


In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified out of Accumulative Other Comprehensive Income (ASU 2013-02), which replaces the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2011-05 and ASU 2011-12. ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and to present significant amounts reclassified out of accumulated other comprehensive income by respective line items of net income if the amount reclassified is required to be reclassified to net income in its entirety. We adopted ASU 2013-02 in the second quarter of fiscal year 2013 and applied it prospectively. The adoption of ASU 2013-02 did not have any impact on our financial position, results of operations or cash flows.

Note 2: Cash, Cash Equivalents and Investments

A summary of our cash, cash equivalents and available-for-sale investments at May 31, 2013 is as follows (in thousands):
 
 
Amortized Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
170,476

 
$

 
$

 
$
170,476

Money market funds
47,911

 

 

 
47,911

State and municipal bond obligations
37,228

 
189

 

 
37,417

Auction rate securities – municipal bonds
27,150

 

 
(3,588
)
 
23,562

Auction rate securities – student loans
3,500

 

 
(562
)
 
2,938

Total
$
286,265

 
$
189

 
$
(4,150
)
 
$
282,304


A summary of our cash, cash equivalents and available-for-sale investments at November 30, 2012 is as follows (in thousands):
 
 
Amortized Cost Basis
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Cash
$
176,201

 
$

 
$

 
$
176,201

Money market funds
125,591

 

 

 
125,591

State and municipal bond obligations
50,565

 
255

 
(2
)
 
50,818

Auction rate securities – municipal bonds
27,175

 

 
(3,755
)
 
23,420

Auction rate securities – student loans
3,500

 

 
(599
)
 
2,901

Corporate bonds
2,608

 

 
(1
)
 
2,607

Total
$
385,640

 
$
255

 
$
(4,357
)
 
$
381,538


Such amounts are classified on our condensed consolidated balance sheets as follows (in thousands):
 
 
May 31, 2013
 
November 30, 2012
 
Cash and
Equivalents
 
Short-Term
Investments
 
Long-Term
Investments
 
Cash and
Equivalents
 
Short-Term
Investments
 
Long-Term
Investments
Cash
$
170,476

 
$

 
$

 
$
176,201

 
$

 
$

Money market funds
47,911

 

 

 
125,591

 

 

State and municipal bond obligations

 
37,417

 

 

 
50,818

 

Auction rate securities – municipal bonds

 

 
23,562

 

 

 
23,420

Auction rate securities – student loans

 

 
2,938

 

 

 
2,901

Corporate bonds

 

 

 

 
2,607

 

Total
$
218,387

 
$
37,417

 
$
26,500

 
$
301,792

 
$
53,425

 
$
26,321


The valuation methodologies for our auction rate securities (ARS) are described in Note 4. Based on these methodologies, we determined that the fair value of our ARS investments is $26.5 million and $26.3 million at May 31, 2013 and November 30, 2012, respectively. The temporary impairment recorded in accumulated other comprehensive loss to reduce the value of our available-for-sale ARS investments was $4.2 million and $4.4 million at May 31, 2013 and November 30, 2012, respectively.

9



We will not be able to access the funds associated with our ARS investments until a future auction for these ARS is successful, we sell the securities in a secondary market, or they are redeemed by the issuer. As such, these remaining investments currently lack short-term liquidity and are therefore classified as long-term investments on the condensed consolidated balance sheets at May 31, 2013 and November 30, 2012.

Based on our cash, cash equivalents and short-term investments balance of $255.8 million, expected operating cash flows and the availability of funds under our revolving credit facility, we do not anticipate that the lack of liquidity associated with our ARS will adversely affect our ability to conduct business and we believe that we have the ability to hold the affected securities throughout the currently estimated recovery period. Therefore, the impairment of these securities is considered only temporary in nature. If the credit rating of either the security issuer or the third-party insurer underlying the investments deteriorates significantly, we may be required to adjust the carrying value of the ARS through an other-than-temporary impairment charge to earnings.

The fair value of debt securities by contractual maturity is as follows (in thousands):
 
 
May 31,
2013
 
November 30,
2012
Due in one year or less (1)
$
46,705

 
$
55,001

Due after one year
17,212

 
24,745

Total
$
63,917

 
$
79,746

 
(1)
Includes ARS which are tendered for interest-rate setting purposes periodically throughout the year. Beginning in February 2008, auctions for these securities began to fail, and therefore these investments currently lack short-term liquidity. The remaining contractual maturities of these securities range from 11 to 30 years.

Investments with continuous unrealized losses and their related fair values are as follows at May 31, 2013 (in thousands):
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Auction rate securities – municipal bonds
$

 
$

 
$
23,562

 
$
(3,588
)
 
$
23,562

 
$
(3,588
)
Auction rate securities – student loans

 

 
2,938

 
(562
)
 
2,938

 
(562
)
Total
$

 
$

 
$
26,500

 
$
(4,150
)
 
$
26,500

 
$
(4,150
)

Investments with continuous unrealized losses and their related fair values are as follows at November 30, 2012 (in thousands):
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
State and municipal bond obligations
$
5,818

 
$
(1
)
 
$
472

 
$
(1
)
 
$
6,290

 
$
(2
)
Auction rate securities – municipal bonds

 

 
23,420

 
(3,755
)
 
23,420

 
(3,755
)
Auction rate securities – student loans

 

 
2,901

 
(599
)
 
2,901

 
(599
)
Corporate bonds
2,607

 
(1
)
 

 

 
2,607

 
(1
)
Total
$
8,425

 
$
(2
)
 
$
26,793

 
$
(4,355
)
 
$
35,218

 
$
(4,357
)

The unrealized losses associated with state and municipal bond obligations and corporate bonds are attributable to changes in interest rates. The unrealized losses associated with ARS are discussed above. Management does not believe any unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of May 31, 2013 and November 30, 2012.


10


Note 3: Derivative Instruments

We use forward contracts that are not designated as hedging instruments to hedge economically the impact of the variability in exchange rates on accounts receivable and collections denominated in certain foreign currencies. We generally do not hedge the net assets of our international subsidiaries. All forward contracts are recorded at fair value in other current assets on the condensed consolidated balance sheets at the end of each reporting period and expire within 90 days. In the three and six months ended May 31, 2013 and May 31, 2012, realized and unrealized gains (losses) of $0.6 million, $(0.5) million, $2.5 million and $0.3 million, respectively, from our forward contracts were recognized in other income (expense) in the condensed consolidated statements of income. These losses were substantially offset by realized and unrealized gains on the offsetting positions.

The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands):
 
 
May 31, 2013
 
November 30, 2012
 
Notional Value
 
Fair Value
 
Notional Value
 
Fair Value
Forward contracts to sell U.S. dollars
$
22,025

 
$
(55
)
 
$
6,453

 
$
4

Forward contracts to purchase U.S. dollars
19,900

 
15

 
31,465

 
(190
)
Total
$
41,925

 
$
(40
)
 
$
37,918

 
$
(186
)

Note 4: Fair Value Measurements

Recurring Fair Value Measurements

The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at May 31, 2013 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Money market funds
$
47,911

 
$
47,911

 
$

 
$

State and municipal bond obligations
37,417

 

 
37,417

 

Auction rate securities – municipal bonds
23,562

 

 

 
23,562

Auction rate securities – student loans
2,938

 

 

 
2,938

Foreign exchange derivatives
(40
)
 

 
(40
)
 

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
379

 
$

 
$

 
$
379


The following table details the fair value measurements within the fair value hierarchy of our financial assets at November 30, 2012 (in thousands):
 
 
 
 
Fair Value Measurements Using
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
Money market funds
$
125,591

 
$
125,591

 
$

 
$

State and municipal bond obligations
50,818

 

 
50,818

 

Auction rate securities – municipal bonds
23,420

 

 

 
23,420

Auction rate securities – student loans
2,901

 

 

 
2,901

Corporate bonds
2,607

 

 
2,607

 

Foreign exchange derivatives
(186
)
 

 
(186
)
 



11


When developing fair value estimates, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market prices to measure fair value. The valuation technique used to measure fair value for our Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that use primarily market based parameters including yield curves, volatilities, credit ratings and currency rates. In certain cases where market rate assumptions are not available, we are required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.

The valuation technique used to measure fair value for our Level 3 assets, which consists of our ARS, is primarily an income approach, where the expected weighted average future cash flows are discounted back to present value for each asset. The significant unobservable inputs used in the fair value measurement of our ARS are the probability of earning the maximum rate until maturity, the probability of principal return prior to maturity, the probability of default, the liquidity risk premium and the recovery rate in default. Generally, interrelationships are such that a change in the assumptions used for the probability of principal return prior to maturity is accompanied by a directionally opposite change in one or more the following assumptions: the probability of earning the maximum rate until maturity, the probability of default and the liquidity risk premium. The recovery rate in default is somewhat independent and based upon the ARS' specific underlying assets and published recovery rate studies.

One issuer of our ARS is currently in default, but the underlying bond insurer is making interest payments on the issuer's behalf. In this situation, we used a market approach, where the significant unobservable inputs are the market credit default swap spread and the credit rating of the insurer.

The following table provides additional quantitative information about the unobservable inputs used in our Level 3 valuations as of May 31, 2013:

 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
Auction rate securities
Discounted cash flow
 
Probability of earning the maximum rate until maturity
 
0.3% - 9.4% (1.6%)
 
 
 
Probability of principal return prior to maturity
 
79.1% - 95.2% (88.6%)
 
 
 
Probability of default
 
4.0% - 12.8% (9.8%)
 
 
 
Liquidity risk premium
 
4.0%
 
 
 
Recovery rate in default
 
50% - 70% (56.5%)
 
Market valuation
 
Market credit default swap spread of insurer
 
2.8%
 
 
 
Credit rating of insurer
 
AA-

Significant increases or decreases in the underlying assumptions used to value the ARS could significantly increase or decrease the fair value estimates recorded in the consolidated balance sheets.

We have classified contingent consideration related to the Rollbase, Inc. acquisition (Rollbase), which occurred in May 2013 (Note 7), within Level 3 of the fair value hierarchy because the fair value is derived using significant unobservable inputs, which include discount rates and probability-weighted cash flows. We determined the fair value of our contingent consideration obligations based on a probability-weighted income approach derived from probability assessments of the attainment of certain milestones. We establish discount rates to be utilized in our valuation models based on the cost to borrow that would be required by a market participant for similar instruments. In determining the probability of attaining certain milestones, we utilize data regarding similar milestone events from our own experience. On a quarterly basis, we will reassess the probability factors associated with the milestones for our contingent consideration obligations. Significant judgment is employed in determining the appropriateness of these key assumptions as of the acquisition date and for each subsequent period.

The key assumptions as of May 31, 2013 related to the contingent consideration for the acquisition of Rollbase used in the model are probabilities in excess of 95% that the milestones associated with the contingent consideration will be achieved and a discount rate of 4.8%. A decrease in the probabilities of achievement could result in a significant decrease to the estimated fair value of the contingent consideration liability.

12



During the three months ended May 31, 2013, there was no change in the fair value of the contingent consideration liability related to the Rollbase acquisition.

The following table reflects the activity for our financial assets measured at fair value using Level 3 inputs for each period presented (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2013
 
May 31,
2012
 
May 31,
2013
 
May 31,
2012
Balance, beginning of period
$
26,442

 
$
33,343

 
$
26,321

 
$
33,539

Redemptions and repurchases

 

 
(25
)
 
(225
)
Transfer to Level 2 fair value measurement

 
(2,700
)
 

 
(2,700
)
Unrealized gains included in accumulated other comprehensive loss
58

 
805

 
204

 
834

Balance, end of period
$
26,500

 
$
31,448

 
$
26,500

 
$
31,448


During the second quarter of fiscal year 2012, we received a redemption notice for one of our ARS at par value. We transferred the ARS to a Level 2 fair value measurement, as the value at May 31, 2012 was based on observable inputs.

Nonrecurring Fair Value Measurements

The following table details our nonrecurring fair value measurements at November 30, 2012 (in thousands):

 
 
 
Fair Value Measurements Using
 
 
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Total Losses
Disposal group
$
16,487

 
$

 
$
16,487

 
$

 
$
8,601


The disposal group included the assets and liabilities held for sale of the Artix, Orbacus and Orbix product lines, which had a fair value of $16.5 million as of November 30, 2012. The carrying value at November 30, 2012 of $25.1 million was written down to fair value, less costs to sell, resulting in a loss of $8.6 million. The loss was recorded in income (loss) from discontinued operations in fiscal year 2012. The assets and liabilities held for sale were divested in the first quarter of fiscal year 2013 (Note 6).

We evaluate all of our assets held for sale using undiscounted cash flow models or other valuation models, such as comparative transactions and market multiples, to determine their fair values. However, a market approach was more heavily used to value the assets held for sale related to the divestitures of our non-core product lines. As bid and transaction values became apparent as we moved through the marketing and divestiture process, the fair values of the assets held for sale was established. The impairment loss recorded for the Artix, Orbacus and Orbix product lines was primarily based on our expectations of a sale price as compared to our estimation of the net assets to be sold at closing.

Note 5: Intangible Assets and Goodwill

Intangible Assets

Intangible assets are comprised of the following significant classes (in thousands):
 
 
May 31, 2013
 
November 30, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Purchased technology
$
44,652

 
$
(35,509
)
 
$
9,143

 
$
42,520

 
$
(40,066
)
 
$
2,454

Customer-related and other
19,529

 
(17,242
)
 
2,287

 
26,477

 
(23,812
)
 
2,665

Total
$
64,181

 
$
(52,751
)
 
$
11,430

 
$
68,997

 
$
(63,878
)
 
$
5,119


13



As of the result of the Rollbase acquisition in May 2013 (Note 7), we recorded $7.8 million of purchased technology and $0.2 million of customer relationships as intangible assets during the six months ended May 31, 2013. These intangible assets have a weighted average useful life of 4.9 years. This was offset by a decrease in the gross carrying amount of our intangible assets due to the intangible assets held for sale as of May 31, 2013 (Note 6).

In the three and six months ended May 31, 2013, amortization expense related to intangible assets was $0.3 million and $0.6 million, respectively. In the three and six months ended May 31, 2012, amortization expense related to intangible assets was $0.3 million and $0.8 million, respectively.

Future amortization expense for intangible assets as of May 31, 2013, is as follows (in thousands):
 
Remainder of 2013
$
1,480

2014
2,638

2015
2,409

2016
1,906

2017
1,906

Thereafter
1,091

Total
$
11,430


Goodwill

Changes in the carrying amount of goodwill for the six months ended May 31, 2013, are as follows (in thousands):

Balance, November 30, 2012
$
226,110

Additions
4,798

Goodwill transfered to assets held for sale
(6,377
)
Translation adjustments
(91
)
Balance, May 31, 2013
$
224,440


The addition to goodwill during fiscal year 2013 is related to the acquisition of Rollbase in May 2013 (Note 7). The transfer of goodwill to assets held for sale is related to the disposition of the Apama product line (Note 6).

During the first quarter of fiscal year 2013, we completed our annual testing for impairment of goodwill and, based on those tests, concluded that no impairment of goodwill existed as of December 15, 2012. During the second quarter of fiscal year 2013, we evaluated the impact of the disposition of the Apama product line, which is part of our single reportable segment, on goodwill and concluded that no impairment existed. Through the date and time our condensed consolidated financial statements were issued, no other trigger events have occurred that would indicate a potential impairment of goodwill exists.


14


Note 6: Divestitures

Under the Plan, we announced we would divest all product lines which are not considered core product lines of our business: Actional, Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic. The FuseSource and Shadow product lines were divested in fiscal year 2012. The remaining product lines were divested in the first quarter of fiscal year 2013.

In June 2013, we entered into a definitive purchase and sale agreement to divest our Apama product line to Software AG. The sale is expected to close in July 2013 for $44.3 million. As of the end of the fiscal second quarter of 2013, we met the requirements to classify the Apama product line as both held for sale and discontinued operations in the condensed consolidated financial statements.

Revenues and direct expenses of the divested product lines and the Apama product line have been reclassified as discontinued operations for all periods presented. The fiscal year 2012 results include revenues and direct expenses of all divested product lines and the Apama product line, since we earned revenues and incurred direct expenses for all or part of fiscal year 2012 for each of those product lines. The fiscal year 2013 results include the revenues and direct expenses of Apama and the divested product lines which had not occurred prior to the start of fiscal year 2013.

The components included in discontinued operations on the condensed consolidated statements of income are as follows (in thousands):

 
Three Months Ended
 
Six Months Ended
 
May 31, 2013
 
May 31, 2012
 
May 31, 2013
 
May 31, 2012
Revenue
$
4,431

 
$
40,468

 
$
15,606

 
$
82,423

Income (loss) before income taxes
(4,802
)
 
(16,572
)
 
(3,117
)
 
(29,718
)
Income tax provision (benefit)
(570
)
 
(5,809
)
 
(433
)
 
(10,584
)
Gain on sale, net of tax

 

 
19,757

 

Income (loss) from discontinued operations, net
$
(4,232
)
 
$
(10,763
)
 
$
17,073

 
$
(19,134
)

Apama

The assets and liabilities being sold to Software AG are classified as assets and liabilities held for sale on the condensed balance sheet as of May 31, 2013 and are recorded at the lower of their carrying values or fair values less costs to sell. The major categories of the assets and liabilities held for sale are as follows (in thousands):

Assets:
 
Accounts receivable
$
3,672

Other current assets
165

Goodwill and intangible assets
6,990

Other long-term assets
409

Total assets held for sale
$
11,236

Liabilities:
 
Deferred revenue
$
4,012

Total liabilities held for sale
$
4,012


Artix, Orbacus and Orbix

In the first quarter of fiscal year 2013, we entered into a definitive purchase and sale agreement to divest our Artix, Orbacus and Orbix product lines to a subsidiary of Micro Focus International plc (Micro Focus). The divestiture of these product lines was part of the Plan. The sale closed in February 2013 for total consideration of $15.0 million.


15


The gain on sale of the Artix, Orbacus and Orbix product lines is calculated as follows (in thousands):

Purchase price
$
15,000

Less: transaction costs
826

Less: indemnification obligation
1,000

Less: net assets
 
Accounts receivables
2,300

Goodwill and intangible assets
24,325

Other assets
20

Impairment reserve
(8,601
)
Deferred revenue
(5,893
)
Gain on sale
1,023

Tax provision

Gain on sale, net of tax
$
1,023


In February 2013, upon the closing of the sale of Artix, Orbacus and Orbix, we amended the definitive purchase and sale agreement with Micro Focus to provide an additional indemnification obligation with respect to a specified vendor. The fair value of the indemnification obligation on the date the sale closed and the carrying value at May 31, 2013 is $1.0 million, and is included in other accrued liabilities in the condensed consolidated balance sheet. Our maximum indemnification obligation with respect to this matter is $11.3 million. The term of the indemnification is indefinite; however, we expect the matter to be substantially resolved within the next nine months.

In the fourth quarter of fiscal year 2012, we recorded an $8.6 million impairment loss on the Artix, Orbacus and Orbix assets held for sale based on our expectations of a sales price as compared to our estimation of the net assets to be sold at closing. The impairment loss was recorded as a reserve against the assets held for sale as of November 30, 2012. The gain recorded in the first quarter of fiscal year 2013 was the result of differences in our estimation of net assets to be sold at closing versus the actual value of the net assets sold at closing.

Actional, DataXtend, ObjectStore, Savvion and Sonic

In the fourth quarter of fiscal year 2012, we entered into a definitive purchase and sale agreement to divest our Actional, DataXtend, Savvion and Sonic product lines to the investment arm of Trilogy Enterprises. In December 2012, the agreement was amended to include the sale of our ObjectStore product line. The divestiture of these product lines was part of the Plan. The sale closed in December 2012 for total consideration of $60.5 million.

The gain on sale of the Actional, DataXtend, ObjectStore, Savvion and Sonic product lines is calculated as follows (in thousands):

Purchase price
$
60,500

Less: transaction costs
1,211

Less: net assets
 
Accounts receivables
12,004

Goodwill and intangible assets
31,693

Other assets
976

Deferred revenue
(19,168
)
Other liabilities
(299
)
Gain on sale
34,083

Tax provision
15,349

Gain on sale, net of tax
$
18,734

 

16


Note 7: Business Combinations

On May 24, 2013, we acquired 100% of the equity interests in Rollbase, Inc. (Rollbase), a privately held software vendor based in Saratoga, California, for $9.9 million. The purchase consideration consisted of $9.5 million in cash paid and $0.4 million of contingent consideration, expected to be paid out over a two year period. The fair value of the contingent consideration was estimated to be $0.4 million at the date of acquisition. Rollbase provides Application Platform-as-a-Service (aPaas) technology that allows the rapid design, development and deployment of on-demand business applications. The purpose of the acquisition was to further the Plan in which we intend to become a leading provider of a next-generation, context-aware application development and deployment platform in the Cloud for the aPaas market. The acquisition was accounted for as a business combination, and accordingly, the results of operations of Rollbase are included in our operating results from the date of acquisition. We paid the purchase price in cash from available funds.

The preliminary allocation of the purchase price is as follows (in thousands):

 
Total
 
Life
Cash
$
50

 
 
Acquired intangible assets
7,960

 
1 to 5 years
Goodwill
4,798

 
 
Deferred taxes
(2,921
)
 
 
Accounts payable and other liabilities
(8
)
 
 
Net assets acquired
$
9,879

 
 

The purchase consideration includes contingent consideration payable by the Company based on the achievement of certain milestones. The Company determined the fair value of the contingent consideration obligations by calculating the probability-weighted earn-out payments based on the assessment of the likelihood that the milestones will be achieved. The probability-weighted earn-out payments were then discounted using a discount rate commensurate with the credit risk of the Company.

The stock purchase agreement included contingent earn-out provisions requiring the Company to make payments to former Rollbase owners now employed by the Company. We have concluded that the earn-out provisions for the individuals now employed by the Company, which total approximately $5.0 million, are compensation arrangements and we will accrue the maximum payouts ratably over the two year performance period, as we believe it is probable that the criteria will be met.
        
We recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. We believe that the investment value of the future enhancement of our product and solution offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $4.8 million of goodwill, which is not deductible for tax purposes. The preliminary fair value estimates of the acquired assets and liabilities are based upon preliminary calculations and valuations and our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period (up to one year from the acquisition date). The areas of those preliminary estimates that are not yet finalized relate to identifiable intangible assets and acquired deferred tax liabilities.

We incurred approximately $1.3 million of acquisition-related costs which are included in acquisition-related expenses in our consolidated statement of operations for the three and six months ended May 31, 2013. This amount includes a $1.0 million termination fee related to a pre-existing license arrangement between Rollbase and another third-party.

We have not disclosed the amount of revenues and earnings of Rollbase since acquisition, nor pro forma financial information, as those amounts are not significant to our condensed consolidated financial statements.

Note 8: Line of Credit

Our credit facility provides for a revolving line of credit in the amount of $150.0 million, with a sublimit for the issuance of standby letters of credit in a face amount up to $25.0 million and swing line loans up to $20.0 million. The credit facility also permits us to increase the revolving line of credit by up to an additional $75.0 million subject to receiving further commitments from lenders and certain other conditions. As of May 31, 2013, there were no amounts outstanding under the revolving line and $0.4 million of letters of credit.


17


Note 9: Common Stock Repurchases

We repurchased and retired 7,613,000 shares of our common stock for $169.5 million in the six months ended May 31, 2013. The shares were repurchased as part of our Board of Directors authorized return of capital to shareholders in the form of share repurchases through fiscal year 2013 of $350.0 million. No shares were repurchased in the six months ended May 31, 2012.

Note 10: Stock-Based Compensation

Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the relevant service period. We estimate the fair value of each stock-based award on the measurement date using either the current market price of the stock or the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield. We recognize stock-based compensation expense on a straight-line basis over the service period of the award, which is generally 4 or 5 years for options and 3 years for restricted stock units and restricted stock awards.

The following table provides the classification of stock-based compensation as reflected in our condensed consolidated statements of income (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2013
 
May 31,
2012
 
May 31,
2013
 
May 31,
2012
Cost of software licenses
$

 
$

 
$

 
$
3

Cost of maintenance and services
158

 
204

 
367

 
429

Sales and marketing
881

 
892

 
1,920

 
2,147

Product development
1,225

 
703

 
2,688

 
1,514

General and administrative
2,717

 
2,782

 
4,495

 
5,206

Stock-based compensation from continuing operations
4,981

 
4,581

 
9,470

 
9,299

Income (loss) from discontinued operations
900

 
2,088

 
1,317

 
4,461

Total stock-based compensation
$
5,881

 
$
6,669

 
$
10,787

 
$
13,760


During the second quarter of fiscal year 2013, in connection with the divestiture of the Apama product line, we entered into transition agreements with five executives. As part of the agreements, the executives are entitled to accelerated vesting of certain stock-based awards upon the completion of the divestiture. Due to the anticipated accelerated vesting, we recognized additional stock-based compensation of $0.6 million in the three and six months ended May 31, 2013 in discontinued operations.

During the six months ended May 31, 2012, the employment of three of our executives terminated. As part of the separation agreements, the executives were entitled to accelerated vesting of certain stock-based awards. Due to the separation and accelerated vesting, we recognized additional stock-based compensation of $1.2 million and $1.8 million in the three and six months ended May 31, 2012, respectively.


Note 11: Accumulated Other Comprehensive Loss

The following table summarizes the changes in accumulated balances of other comprehensive loss during the six months ended May 31, 2013 (in thousands):

 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on investments
 
Accumulated Other Comprehensive Loss
Balance, December 1, 2012
$
(8,183
)
 
$
(2,581
)
 
$
(10,764
)
Other comprehensive income (loss) before reclassifications, net of tax
(2,462
)
 
87

 
(2,375
)
Amounts reclassified from accumulated other comprehensive income (loss)

 

 

Balance, May 31, 2013
$
(10,645
)
 
$
(2,494
)
 
$
(13,139
)

18



The tax effect on accumulated unrealized losses on investments was $1.4 million and $1.5 million as of May 31, 2013 and November 30, 2012, respectively.

Note 12: Restructuring Charges

2012 Restructuring

In the second quarter of fiscal year 2012, our management approved, committed to and initiated certain operational restructuring initiatives to reduce annual costs, including the simplification of our organizational structure and the consolidation of facilities. In addition, as part of the Plan, we have divested the product lines not considered core to our business. Our restructuring actions include both our cost reduction efforts and qualifying costs associated with our divestitures.

Restructuring expenses primarily relate to employee costs, including severance, health benefits, outplacement services and transition divestiture arrangements, but excluding stock-based compensation. Facilities costs include fees to terminate lease agreements and costs for unused space, net of sublease assumptions. Other costs include costs to terminate automobile leases of employees included in the workforce reduction, asset impairment charges for assets no longer deployed as part of cost reduction strategies, costs for unused software licenses as part of the workforce reduction and other costs directly associated with the restructuring actions taken.

As part of the 2012 restructuring, for the three and six months ended May 31, 2013, we incurred expenses totaling $2.8 million and $4.1 million, respectively. Of the $2.8 million total expenses for the second quarter of fiscal year 2013, $0.2 million represents excess facilities and other costs and $2.6 million represents employee severances and related benefits. During the second quarter of fiscal year 2013, as a result of the product divestitures completed in the fourth quarter of fiscal year 2012 and the first quarter of fiscal year 2013, we initiated additional cost reduction actions related to excess facilities and employee redundancy. Of the $4.1 million total expenses for the first six months of fiscal year 2013, $1.1 million represents excess facilities and other costs and $3.0 million represents employee severances and related benefits. The expenses are recorded as restructuring expenses in the condensed consolidated statements of income, with the exception of $0.4 million included in income (loss) from discontinued operations for the six months ended May 31, 2013. Cumulative expenses of the 2012 restructuring through the first six months of fiscal year 2013 are $23.2 million, of which $3.8 million represents excess facilities and other costs and $19.4 million represents employee severances and related benefits.

We expect to incur additional costs with respect to the 2012 restructuring through the remainder of fiscal year 2013. The total cost of the 2012 restructuring is expected to be approximately $5.1 million for excess facilities and other costs and approximately $19.7 million for employee severance and related benefits. The estimated costs not yet recorded in the condensed consolidated statement of income relate to excess facilities costs, net of sublease assumptions, and employee severance-related costs as we transition away from our divested product lines (Note 6).

A summary of activity for the 2012 restructuring action during the six months ended May 31, 2013, is as follows (in thousands):

 
Excess
Facilities and
Other Costs
 
Employee Severance and Related Benefits
 
Total
Balance, December 1, 2012
$
603

 
$
6,429

 
$
7,032

Costs incurred
1,096

 
3,053

 
4,149

Cash disbursements
(398
)
 
(7,286
)
 
(7,684
)
Asset impairment
(111
)
 

 
(111
)
Translation adjustments and other
(18
)
 
34

 
16

Balance, May 31, 2013
$
1,172

 
$
2,230

 
$
3,402


Cash disbursements under the 2012 restructuring are expected to be made through fiscal year 2016. The short-term portion of the restructuring reserve of $3.2 million is included in other accrued liabilities and the long-term portion of $0.2 million is included in other noncurrent liabilities on the condensed consolidated balance sheet at May 31, 2013.


19


2010 Restructuring

During the first and third quarters of fiscal year 2010, our management approved, committed to and initiated plans to restructure and improve efficiencies in our operations as a result of certain management and organizational changes and acquisitions. We reduced our global workforce primarily within the development, sales and administrative organizations. This workforce reduction was conducted across all geographies and also resulted in a consolidation of offices in certain locations. The total costs of the 2010 restructurings primarily relate to employee severance and excess facilities expenses. The excess facilities and other costs represent facilities costs for unused space and termination costs for automobile leases of employees included in the workforce reduction.

As part of the 2010 restructuring activities, we recorded cumulative expenses totaling $43.3 million, of which $8.0 million represents excess facilities and other costs and $35.3 million represents employee severances and related benefits. There were no charges to restructuring expense in the first six months of fiscal year 2013 related to the 2010 activities and we do not expect to incur additional expenses related to these activities.

As of November 30, 2012, we had a remaining reserve related to severance payments of $0.3 million, which is included in other accrued liabilities on the condensed consolidated balance sheets. We paid the remaining benefits during the first six months of fiscal year 2013.

Note 13: Income Taxes

Our income tax provision for the second quarter of fiscal year 2013 and 2012 reflects our estimates of the effective tax rates expected to be applicable for the full fiscal years, adjusted for any discrete events which are recorded in the period they occur. The estimates are reevaluated each quarter based on our estimated tax expense for the full fiscal year.

The research and development credit was retroactively reinstated in January 2013. As a result, in the first quarter of fiscal year 2013 we recorded a tax benefit of $0.4 million related to qualifying research and development activities for the period from January 2012 to November 2012.

The Internal Revenue Service finalized its examination of our U.S. Federal income tax returns for fiscal years 2009 and 2010 during the second quarter of fiscal year 2013. In the first quarter of fiscal year 2013, we had effectively settled certain unrecognized tax benefits which had been reserved in previous periods, reducing our unrecognized tax benefits liability by $1.2 million.

Our Federal income tax returns have been examined or are closed by statute for all years prior to fiscal year 2011, and we are no longer subject to audit for those periods. State taxing authorities are currently examining our income tax returns for years through fiscal year 2010. Our state income tax returns have been examined or are closed by statute for all years prior to fiscal year 2005, and we are no longer subject to audit for those periods.

Tax authorities for certain non-U.S. jurisdictions are also examining returns affecting unrecognized tax benefits, none of which are material to our condensed consolidated balance sheets, cash flows or statements of income. With some exceptions, we are generally no longer subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal year 2007.


20


Note 14: Earnings Per Share

We compute basic earnings per share using the weighted average number of common shares outstanding. We compute diluted earnings per share using the weighted average number of common shares outstanding plus the effect of outstanding dilutive stock options, restricted stock units and deferred stock units, using the treasury stock method. The following table sets forth the calculation of basic and diluted earnings per share from continuing operations on an interim basis (in thousands, expect per share data):
 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2013
 
May 31,
2012
 
May 31,
2013
 
May 31,
2012
Income from continuing operations
$
8,142

 
$
8,855

 
$
17,955

 
$
24,715

Weighted average shares outstanding
54,919

 
63,051

 
56,410

 
62,598

Dilutive impact from common stock equivalents
817

 

 
834

 
1,043

Diluted weighted average shares outstanding
55,736

 
63,051

 
57,244

 
63,641

Basic earnings per share from continuing operations
$
0.15

 
$
0.14

 
$
0.32

 
$
0.39

Diluted earnings per share from continuing operations
$
0.15

 
$
0.14

 
$
0.31

 
$
0.39


We excluded stock awards representing approximately 775,000 shares, 1,084,000 shares, 7,890,000 shares and 3,668,000 shares of common stock from the calculation of diluted earnings per share in the three and six months ended May 31, 2013 and 2012, respectively, because these awards were anti-dilutive.

Note 15: Subsequent Events

In June 2013, we announced the adoption of a Rule 10b5-1 share repurchase plan for the purpose of repurchasing up to $100 million of our common stock as part of our previously announced repurchase authorization, which the Board of Directors increased by $10 million to $360 million. The plan will be active from July 1, 2013 until December 31, 2013 or, if earlier, upon the repurchase of $100 million of our common stock under the plan. We previously utilized a Rule 10b5-1 plan to repurchase $250 million of our common stock between October 2012 and May 2013.

21


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties. Actual future results may differ materially. Statements indicating that we “expect,” “estimate,” “believe,” “are planning” or “plan to” are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are various factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements, including but not limited to the following: the receipt and shipment of new orders; the timely release and market acceptance of new products and/or enhancements to our existing products; the growth rates of certain market segments; the positioning of our products in those market segments; the customer demand and acceptance of any new product initiative; variations in the demand for professional services and technical support; pricing pressures and the competitive environment in the software industry; the continued uncertainty in the U.S. and international economies, which could result in fewer sales of our products and may otherwise harm our business; business and consumer use of the Internet; our ability to complete and integrate acquisitions; our ability to realize the expected benefits and anticipated synergies from acquired businesses; our ability to penetrate international markets and manage our international operations; our ability to execute on the strategic and operational initiatives we are currently undertaking, including any resulting disruption to our business, employees, customers and the manner in which we finance our operations; our ability to absorb allocated costs, primarily general and administrative, into our operations subsequent to the divestitures occurring; and those factors discussed in Part II, Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q, and in Part I, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended November 30, 2012. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. We also cannot assure you that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements that we make.

Use of Constant Currency

Revenue from our international operations has historically represented more than half of our total revenue. As a result, our revenue results have been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the local currencies of our foreign subsidiaries weaken, our consolidated results stated in U.S. dollars are negatively impacted.

As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods. The constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with accounting principles generally accepted in the United States of America (GAAP).

Revised Prior Period Amounts

Our financial results for prior periods have been revised, in accordance with GAAP, to reflect certain changes to the business. Prior period amounts have been revised for the impact of discontinued operations due to the sales or expected sale of our product lines not considered core to our business. Refer to Note 6 of Item 1 of this Quarterly Report on Form 10-Q for an additional description of this item.

Overview

We are a global software company that simplifies and enables the development, deployment and management of business applications on-premise or on any Cloud, on any platform and on any device with minimal IT complexity and low total cost of ownership. In April 2012, we announced a new strategic plan (the "Plan") in which we stated our intention to become a leading provider of a next-generation, context-aware application development and deployment platform in the Cloud for the Application Platform- as-a-Service (aPaas) market. We stated that we would accomplish this objective by investing in our OpenEdge, DataDirect and Decision Analytics product lines and integrating them into a single, cohesive offering.

The Plan is being executed in two phases. In the first phase, we invested in our OpenEdge and DataDirect product lines to make them more Cloud-ready. We also divested ten product lines which we did not consider core to our business: Actional,

22


Artix, DataXtend, FuseSource, ObjectStore, Orbacus, Orbix, Savvion, Shadow and Sonic. In the second half of fiscal year 2012, we also executed on cost reductions as part of the Plan, including the reduction of 11% of our workforce.

Our financial results for fiscal year 2012 were adversely impacted by factors related to the planning, announcement and execution of the first phase of the Plan, which also included the undertaking of large restructuring efforts and the marketing for divestiture and actual sale of the ten non-core product lines. These factors contributed to a very uncertain environment for our company, partners, customers and employees. In particular, during the second and third quarters of fiscal year 2012, customer purchasing decisions were delayed, which caused deal slippage at a greater rate than usual. This was caused both by uncertainty surrounding the Plan and generally deteriorating macroeconomic conditions, primarily in Europe.

In fiscal year 2012 and the first quarter of fiscal year 2013, we entered into definitive purchase and sale agreements to divest the product lines which are not considered core to our business. All divestitures were completed by the end of the first quarter of fiscal year 2013. The aggregate purchase price was approximately $130.0 million. As a result of the divestitures of all the product lines not considered core to our business, we ceased reporting the results of those operations as a separate reportable segment. Beginning in fiscal year 2013, we now operate as one reportable segment.

In the second phase of the Plan, we have begun to unify the product capabilities of our core product lines, which will refine and enhance our next generation, feature-rich application development and deployment solution targeting the new market category of aPaaS. To that end, during the first six months of fiscal year 2013, we added new functionalities to our existing products in furtherance of the Plan. We also completed the acquisition of Rollbase, Inc., a provider of Application Platform-as-a-Service (aPaas) technology that allows the rapid design, development and deployment of on-demand business applications. Lastly, in June 2013, we announced the upcoming release of Progress Pacific, an easy-to-use platform for building and managing "connected apps" on any cloud, mobile or social platform, combining Rollbase with our existing Open Edge, DataDirect and Corticon products in a single platform.

As a result of the enhancements to our existing products and renewed focus on our core products, we have experienced improved financial performance during the first half of fiscal year 2013. However, we are still in the early stages of our transition to becoming a leading vendor in the aPaas market. As a result, we anticipate continued reinvestment in our products will be necessary and sustainable increases in revenue may not be foreseeable in the near term. Overall, our investments to improve our product lines require time to impact performance. Until these investments are realized, our operating margins will be adversely impacted.

In addition, our new business focus and new strategy has required us to restructure our organization and the way we go to market, how we think about and implement product roadmaps and how we operate and report our financial results, all of which caused additional disruption and could cause additional disruption in the future as we implement our new go to market plans. Our operating performance is also being adversely impacted by temporarily higher expense levels as we transition away from the product lines we divested. We expect to be impacted by higher expense levels until all appropriate steps are taken under our Plan to improve our operating margin.

We derive a significant portion of our revenue from international operations, which are primarily conducted in foreign currencies. As a result, changes in the value of these foreign currencies relative to the U.S. dollar have significantly impacted our results of operations and may impact our future results of operations.

In June 2013, we entered into a definitive purchase and sale agreement to divest our Apama product line to Software AG. The target market, deployment and sales model for the Apama product line differs significantly from those of our aPaas strategy and the divestiture allows us to focus entirely on providing leading cloud and mobile application development technologies through a single cohesive platform. The sale is expected to close in July 2013 for $44.3 million.

We believe that existing cash balances, together with funds generated from operations and amounts available under our revolving credit line will be sufficient to finance our operations and meet our foreseeable cash requirements, including our plans to repurchase shares of our common stock, through at least the next twelve months.

Our Board of Directors also authorized us to repurchase $350.0 million of our common stock through November 2013. In October 2012, under the authorization, we announced the adoption of a 10b5-1 plan to repurchase up to $250.0 million of our common stock through June 30, 2013, or earlier. We completed the 10b5-1 plan in May 2013, having repurchased 11.7 million shares of our common stock for $250.0 million. Through May 31, 2013, we have repurchased a total of 12.1 million shares for $257.9 million under the $350.0 million authorization.


23


In June 2013, we announced the adoption of a Rule 10b5-1 share repurchase plan for the purpose of repurchasing up to $100 million of our common stock as part of our previously announced repurchase authorization, which the Board of Directors increased by $10 million to $360 million. The plan will be active from July 1, 2013 until December 31, 2013 or, if earlier, upon the repurchase of $100 million of our common stock under the plan. As of July 1, 2013, we have repurchased 86,000 shares of our common stock for $2.0 million under this plan.

Results of Operations

The following table sets forth certain income and expense items as a percentage of total revenue, and the percentage change in dollar amounts of such items compared with the corresponding period in the previous fiscal year:
 
 
Percentage of Total Revenue
 
Percentage Change
 
Three Months Ended
 
Six Months Ended
 
Three Months Ended
 
Six Months Ended
 
May 31, 2013
 
May 31, 2012
 
May 31, 2013
 
May 31, 2012
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Software licenses
36
 %
 
28
 %
 
36
 %
 
32
 %
 
43
 %
 
18
 %
Maintenance and services
64

 
72

 
64

 
68

 
(2
)
 

Total revenue
100

 
100

 
100

 
100

 
10

 
6

Costs of revenue:
 
 
 
 
 
 
 
 
 
 
 
Cost of software licenses
2

 
2

 
2

 
2

 

 
26

Cost of maintenance and services
9

 
10

 
9

 
9

 
(2
)
 
4

Amortization of acquired intangibles

 

 

 

 
3

 
(26
)
Total costs of revenue
11

 
12

 
11

 
11

 
(1
)
 
7

Gross profit
89

 
88

 
89

 
89

 
12

 
5

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
32

 
26

 
33

 
27

 
34

 
29

Product development
18

 
14

 
17

 
13

 
41

 
37

General and administrative
17

 
24

 
17

 
21

 
(22
)
 
(14
)
Amortization of acquired intangibles

 

 

 

 
(20
)
 
(19
)
Restructuring expenses
3

 
6

 
2

 
3

 
(42
)
 
(21
)
Acquisition-related expenses
2

 

 
1

 

 
100

 
492

Total operating expenses
72

 
70

 
70

 
64

 
12

 
15

Income from operations
17

 
18

 
19

 
25

 
12

 
(20
)
Other (expense) income

 

 
(1
)
 

 
(217
)
 
(262
)
Income from continuing operations before income taxes
17

 
18

 
18

 
25

 
8

 
(24
)
Provision for income taxes
7

 
6

 
7

 
9

 
42

 
(17
)
Income from continuing operations
10

 
12

 
11

 
16

 
(8
)
 
(27
)
Income (loss) from discontinued operations, net
(5
)
 
(15
)
 
10

 
(12
)
 
61

 
189

Net income
5
 %
 
(3
)%
 
21
 %
 
4
 %
 
305
 %
 
528
 %
 

24


Revenue

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2013
 
May 31, 2012
 
As Reported
 
Constant
Currency
Revenue
$
81,705

 
$
74,128

 
10
%
 
12
%

 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2013
 
May 31, 2012
 
As Reported
 
Constant
Currency
Revenue
$
165,438

 
$
156,599

 
6
%
 
6
%


Total revenue increased $7.6 million, or 12% on a constant currency basis and 10% using actual exchange rates, in the second quarter of fiscal year 2013 as compared to the same quarter last year and increased $8.8 million, or 6% on a constant currency basis and 6% using actual exchange rates, in the first six months of fiscal year 2013 as compared to the same period in the prior year. The increase was primarily a result of an increase in license revenue, driven by an increased focus on OpenEdge and DataDirect products in the North America and EMEA regions.

Changes in prices from fiscal year 2012 to 2013 did not have a significant impact on our revenue. Changes in foreign currency exchange rates negatively impacted our reported revenues.

License Revenue

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2013
 
May 31, 2012
 
As Reported
 
Constant
Currency
License
$
29,347

 
$
20,506

 
43
%
 
45
%
As a percentage of total revenue
36
%
 
28
%
 
 
 
 

 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2013
 
May 31, 2012
 
As Reported
 
Constant
Currency
License
$
59,254

 
$
50,179

 
18
%
 
19
%
As a percentage of total revenue
36
%
 
32
%
 
 
 
 

License revenue increased $8.8 million, or 43%, in the second quarter of fiscal year 2013 as compared to the same quarter last year, and increased $9.1 million, or 18%, in the first six months of fiscal year 2013 as compared to the same period last year. The increase was driven by an increased focus on OpenEdge and DataDirect products in the North America and EMEA regions.

Maintenance and Services Revenue
 
 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2013
 
May 31, 2012
 
As Reported
 
Constant
Currency
Maintenance
$
50,419

 
$
51,350

 
(2
)%
 
(1
)%
As a percentage of total revenue
62
%
 
69
%
 
 
 
 
Professional services
1,939

 
2,272

 
(15
)%
 
(14
)%
As a percentage of total revenue
2
%
 
3
%
 
 
 
 
Total maintenance and services revenue
$
52,358

 
$
53,622

 
(2
)%
 
(1
)%
As a percentage of total revenue
64
%
 
72
%
 
 
 
 

25



 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2013
 
May 31, 2012
 
As Reported
 
Constant
Currency
Maintenance
$
101,875

 
$
101,515

 
 %
 
1
 %
As a percentage of total revenue
62
%
 
65
%
 
 
 
 
Professional services
4,309

 
4,905

 
(12
)%
 
(12
)%
As a percentage of total revenue
2
%
 
3
%
 
 
 
 
Total maintenance and services revenue
$
106,184

 
$
106,420

 
 %
 
1
 %
As a percentage of total revenue
64
%
 
68
%
 
 
 
 

Maintenance and services revenue decreased $1.3 million, or 2%, in the second quarter of fiscal year 2013 as compared to the same quarter last year. Maintenance revenue decreased 2% and professional services revenue decreased 15% in the second quarter of fiscal year 2013 as compared to the second quarter of fiscal year 2012.

Maintenance and services revenue was flat in the first six months of fiscal year 2013 as compared to the same period last year, primarily as a result of maintenance revenue remaining consistent year over year. Professional services revenue decreased 12% in the first six months of fiscal year 2013 as compared to the first six months of fiscal year 2012.

Maintenance revenue remained flat in the second quarter of fiscal year 2013 and the first six months of fiscal year 2013 compared to the same time periods of the previous year as maintenance renewal rates remained consistent with our historical rates. Professional services revenue decreased due to a lower number of professional services engagements.

Revenue by Region

 
Three Months Ended
 
Percentage Change
(In thousands)
May 31, 2013
 
May 31, 2012
 
As Reported
 
Constant
Currency

North America
$
37,540

 
$
32,190

 
17
 %
 
17
 %
As a percentage of total revenue
46
%
 
44
%
 
 
 
 
EMEA
$
33,481

 
$
30,689

 
9
 %
 
11
 %
As a percentage of total revenue
41
%
 
41
%
 
 
 
 
Latin America
$
6,526

 
$
6,660

 
(2
)%
 
4
 %
As a percentage of total revenue
8
%
 
9
%
 
 
 
 
Asia Pacific
$
4,158

 
$
4,589

 
(9
)%
 
(7
)%
As a percentage of total revenue
5
%
 
6
%
 
 
 
 

 
Six Months Ended
 
Percentage Change
(In thousands)
May 31, 2013
 
May 31, 2012
 
As Reported
 
Constant
Currency
North America
$
76,849

 
$
68,932

 
11
 %
 
11
 %
As a percentage of total revenue
46
%
 
44
%
 
 
 
 
EMEA
$
66,029

 
$
64,197

 
3
 %
 
3
 %
As a percentage of total revenue
40
%
 
41
%
 
 
 
 
Latin America
$
13,348

 
$
14,046

 
(5
)%
 
3
 %
As a percentage of total revenue
8
%
 
9
%
 
 
 
 
Asia Pacific
$
9,212

 
$
9,424

 
(2
)%
 
(1
)%
As a percentage of total revenue
6